LONDON/JOHANNESBURG -- BHP Billiton has made a long-awaited bid approach to Rio Tinto in a move aimed at creating a $US350 billion-plus mining giant, but Rio rejected the all-share proposal as too low.

Rio shares leapt as much as 30 per cent in London to a record high after it said BHP had proposed offering three of its shares for every one Rio share -- worth about $US140 billion at current prices.

That would make it the world's second-biggest takeover deal after mobile phone giant Vodafone's purchase of Mannesmann in 2000 and would create a $US360 billion company -- roughly the same size as US computing giant Microsoft.

"The boards of Rio Tinto have given the proposal careful consideration and concluded that it significantly undervalues Rio Tinto and its prospects," Rio, the world's third-biggest miner, said in a statement.

But BHP, already the world's biggest miner, was undeterred.

"BHP ... intends to continue to seek an opportunity to meet and discuss its proposal with Rio Tinto," it said in a statement.

At 2305 AEDT, Rio shares in London were up 28.7 per cent at 5,600 pence after hitting a record 5,638 pence. BHP was down 1.2 per cent at 1,735 pence.

A marriage of BHP and Rio would assemble a massive controlling force across a range of industrial-use commodities such as copper, aluminium, iron ore and coal, but would likely face competition concerns.

Competition

"In preparing its proposal, BHP Billiton has examined in detail the regulatory issues and other practicalities of a combination," BHP said in its statement.

"There can be no assurance that any transaction or offer will result from BHP Billiton's proposal," it added.

News of BHP's proposal comes amid a general downturn in mergers and acquisitions as banks rein in lending in response to losses on low quality US mortgages.

"Clearly, one has to distinguish between M&A that might be funded by capital in credit markets, and here it would appear that it is a share exchange," said Insight Investment fund manager Tim Rees.

"It shows the clear scale of the synergies that might be available (and also) shows confidence within the mining industry about the global economy."

Newly-installed chief executive Marius Kloppers, who took over from Chip Goodyear earlier this year, was a key player in BHP Billiton's takeover of WMC Resources. His ascension to the driver's seat of the world's biggest miner was tipped by analysts to herald a new era of mergers and acquisitions.

Some analysts estimate fair value for Rio at up to 28 per cent above current prices, or more than $US150 billion.

Long-standing speculation of a tie-up between BHP and Rio had gathered pace after Rio completed its $39.1 billion purchase of aluminium group Alcan on Wednesday.